Money laundering is becoming an increasingly worldwide and complicated crime as a result of fast technological advancements and the globalization of financial services. Criminals may move millions of dollars instantaneously via computers and satellites thanks to financial systems. Money is increasingly laundered through currency exchanges, stock brokerages, gold dealers, casinos, automotive dealerships, and insurance businesses, in addition to banks.
Because insurance products are frequently offered by independent agents or brokers who do not work directly for insurance firms, the insurance business is appealing to money launderers. Agents and brokers are frequently uninformed of the importance of screening clients and questioning payment methods. In certain situations, such agents and brokers have collaborated with criminals against insurers to aid money laundering.
Why is the Insurance Sector Attractive for Money Laundering
Money laundering occurs in the insurance business because the industry is prone to these operations. Among the causes for this are:
- Large Quantities of Money are Normal: Large sums of money are handled on a regular basis in the insurance industry. Massive financial swings are easier to disregard when there are large claims, huge insurance, and investment accounts.
- The Industry's Diversity: The insurance industry handles a wide range of financial protection. This encompasses anything from life insurance to health insurance to property insurance to vacation insurance. This makes it difficult to detect illegal activity.
- Sudden Shifts: It is not uncommon in the insurance sector to have substantial, unexpected financial transactions. Large claims may be paid out all at once, followed by several months of little action. Nobody believes this sort of conduct is out of the ordinary in the insurance sector.
The insurance industry is vast, diversified, and prosperous. As a result, the sector is vulnerable to money laundering.
AML Risks for the Life Insurance Sector
Life insurance packages are particularly vulnerable since they include greater quantities of money, which is exactly what money launderers need. Some of the Life Insurance elements that are more vulnerable to money laundering are as follows:
- Single-Premium Insurance Policies: Where money launderers can pour a big sum of money into a single transaction in order to protect the funds gained via illegal conduct.
- Relaxation Periods: Customers can cancel their insurance coverage between 14 to 30 days of purchasing it, thanks to the cooling-off period. This allows money launderers to preserve their funds for 30 days before receiving a return and moving the funds elsewhere.
- Policies on Annuities: Money launderers might use their funds to pay for premium plans and earn monthly fixed cash flows.
Signs of Money Laundering in Insurance
Here is a list of some of the possibly questionable practices that insurance professionals may encounter that might be a sign of money laundering or terrorism funding.
- When payments are made to seemingly unconnected third parties, a customer borrows against the cash surrender value of permanent life insurance contracts.
- A consumer acquires a product that looks to be outside of the customer's typical financial means or estate planning requirements.
- A consumer buys insurance goods with a single large premium payment, especially if the payment is done in unique ways such as money or currency equivalents.
- A buyer purchases items with termination characteristics without regard for the investment performance of the product.
- Policies are bought that allow for the transfer of beneficial ownership interests without the insurance issuer's knowledge or approval. This includes used endowment and bearer insurance plans.
- A consumer is known to buy many insurance products and then utilize the proceeds of an early policy surrender to buy other financial assets.
- To make insurance or annuity payments, a client employs many currency equivalents, such as cashier's checks and money orders, from various banks and money service organizations.
- A consumer cancels an insurance package before the end of the free trial period.
- A consumer names an apparently unconnected third person as the beneficiary of an insurance or product.
Reporting such questionable actions is at the top of the list of what an insurance agent does. However, there is no requirement to evaluate if the transactions are related to money laundering, terrorism funding, or another financial crime. That is something best left to individuals with relevant experience.
How Should AML Be Practiced in Insurance Companies?
Knowing the nature of the illegal earnings and still electing to undertake transactions with the money shows that the individual or company is oblivious of the issue and chooses to act without reporting or investigating the illicit funds case. If the corporation decides to advance the case, it will be considered a crime if an individual is suspected of being involved in criminal acts or owns money that is the profits of illegal activity.
Aside from enabling transactions, if a corporation or an employee/agent decides to accept payment using illegal money despite having full knowledge and without examining the source of funds, they will be held accountable. This indicates that the organization should create best practices for KYC compliance rules to avoid such circumstances and protect the company's integrity.
Employees should begin with basic customer information such as name, DOB, and home address. If it is discovered that the customer is a Politically Exposed Person (PEP), they should be vetted against accessible databases for any links to criminal activity or corruption. If an employee is suspicious of a customer, they can report the suspicious individual to top management and the firm's compliance officer, both of whom can further connect with regulatory organizations.
If the BSA requirements are violated, individuals concerned (individual/company) will face serious criminal or civil fines and a danger to their image. Additional regulatory enforcement measures will be taken by the Treasury, FinCEN, and other regulatory authorities. To avoid such infractions, insurance firms must have an effective BSA/AML compliance policy to limit potential ML risks and safeguard the organization from engaging in illegal behavior.
Compliance with Insurance Sanctions
Insurance companies are frequently compelled to conduct checks as part of their AML processes. According to the rules of the relevant nations, they may also be compelled to restrict any transactions made by sanctioned people and report them to the appropriate authorities.
Many nations' authorities maintain sanctions lists that include the names of those involved in financial crimes such as money laundering and terrorism funding. The worldwide community shares the goal of combating financial terrorism. The following are some examples of effective sanctions compliance programs:
- Assessing risk by picking sanctions watchlists that correspond to their customers and country
- Customers must be regularly screened by businesses.
- A procedure for confirming the customer's identification.
- Error detection methods guarantee that staff mistakes are detected.
How to Create an AML Compliance Program for Insurance Companies
In order to build a full, risk-based compliance program with effective processes and procedures that fulfill AML regulatory standards, the insurance business must follow the following rules:
- In order to comply with BSA standards for recordkeeping and reporting, the insurance firm should adopt risk-based policies and processes and internal controls.
- They should appoint a compliance/BSA officer to oversee daily compliance, monitor the efficacy of the BSA program, train workers on an ongoing basis, and update the program as needed.
- Ongoing training involves teaching agents, associates, and relevant staff about their particular roles.
- The officer conducts independent testing of the BSA program on a regular basis.
- Obtaining the customer's essential data for the BSA/AML compliance program
- To conduct routine risk assessments on the insurance company's insured items
AML rules and regulations are followed by insurance businesses all over the world by establishing certain measures to combat financial terrorism and money laundering. Automation and modern technologies may be a specific support mechanism for effectively adhering to commitments. If you want to learn more about how to be AML compliant, you can contact us.